After the fall of yesterday, gold recovered in Asian trading and traded over $1,604/oz prior to renewed selling sent prices below $1,600/oz again.

Gold rebounded on concern that automatic U.S. spending cuts that are due to take effect from tomorrow may hurt the recovery of the U.S., still the world’s largest economy.

More than $85 billion of across-the-board U.S. cuts start tomorrow for the current fiscal year, followed by a March 27 expiration of a funding measure for U.S. agencies.

This should support gold at the $1,600/oz level which is at an “attractive entry point for investors” according to an analyst at CITICS Futures, a unit of China’s biggest listed brokerage.

Chinese demand should support gold and the Shanghai Gold Exchange daily volumes for the benchmark cash contract have been more than double the average in 2012 since February 18, when it reached a record 22,024 kilograms, according to exchange data.

Gold is over 1% higher this week after Federal Reserve Chairman Ben Bernanke defended the central bank’s asset purchases and currency debasement, in addition to the political turmoil in Italy after an election plus the renewed risk of contagion in the Eurozone led to a pickup in demand.

The ECB’s grand bond plan is now in jeopardy after Italian voters rejected EU conditions. Italy's electoral earthquake is “a catastrophe for the euro and the European Union”, according to Luxembourg’s foreign minister, Jean Asselborn.

During the past four years, whenever the euro has declined significantly versus the U.S. dollar, German investors have fled to the safety of gold and been rewarded.

Historically, when the Euro has declined by 8% to 20% since the start of 2008, gold in local currency Euro terms has risen by 14% to 41%, compounded annually.

So far the majority of demand for gold in Europe has been from more conservative German investors and savers due to their knowledge and experience of inflation and hyperinflation.

As the Eurozone debt crisis escalates, demand will be seen across the European Union and not just in Germany.